A recent resolution from Spanish General Directorate of Taxes (GDT), an organism depending form the Spanish Ministry of Finance, has denied the application of the Spanish capital gains exemption to a company participating in a real estate entity (REE) whose sole activity consists of renting a single property. The GDT considers that the REE does not have enough resources to qualify as being engaged in a business activity but, on the opposite, it qualifies as a passive holding entity, (“entidad patrimonial”).
This criterion differs from the one deriving from previous resolutions in which the GDT permitted subcontracting the human resources to an unrelated professional rental manager, in order to consider that a legal entity is conducting economic activities. Let us see why.
✔ According to Spanish Corporate income tax regulations, a company qualifies as a passive holding entity when more than 50% of its assets are not used for the business activity. A company engaged in the property rental qualifies as being engaged in an economic activity when it has a full time employee having a labour contract.
✔ In past resolutions, the GDT accepted subcontracting the human and material resources to an unrelated professional rental manager. This criterion would apply to entities having a high real estate wealth that, given the size of their activity and the volume and importance of their revenue, may substitute the hiring of one full time employee for the subcontracting of the real estate management to specialized professional entities, as this latter business model may result more efficient.
✔ In the case analysed in the resolution CV 2114 – 19 of 12 August, the REE entity is the owner of a golf course that it rents to a tax related entity, which is in charge of managing the golf course with the adequate human and material resources. The externalisation of the golf course management aims at separating patrimonial risks from operating and labour risks associated to the golf course management.
✔ However, in the GDT resolution, it appears that having a single real estate asset (the golf course) does not justify the externalisation of its management. This implies that the gin deriving from the sale of the shares of the REE shall not benefit from the capital gains exemption in proportion to the fiscal years during which the entity qualifies as a passive holding entity.
✔ Based on this resolution’s criteria, it will be necessary to analyse, going forward, whether the management externalisation is justified or not in order to avoid being qualified as a passive holding entity and follow further GDT resolutions to check which conditions must be satisfied in order to consider that a company conducts an economic activity.
Publicado el 01-2020 por PBS